{"id":562205,"date":"2026-09-14T21:50:30","date_gmt":"2026-09-14T20:50:30","guid":{"rendered":"https:\/\/cryptoslate.com\/?p=562205"},"modified":"2026-09-14T11:38:14","modified_gmt":"2026-09-14T10:38:14","slug":"aave-v4-proposal-would-put-dao-funds-first-in-line-to-absorb-lending-losses","status":"publish","type":"post","link":"https:\/\/cryptoslate.com\/aave-v4-proposal-would-put-dao-funds-first-in-line-to-absorb-lending-losses\/","title":{"rendered":"Aave V4 proposal would put DAO funds first in line to absorb lending losses"},"content":{"rendered":"<p>Aave V4 lenders supplying wrapped Ether (WETH), USDC or USDT to its Core liquidity Hub on Ethereum would receive a bad-debt backstop under a Sept. 11 <a href=\"https:\/\/governance.aave.com\/t\/arfc-umbrella-on-aave-v4-coverage-framework-and-initial-market-parametrization\/25623\">proposal from TokenLogic<\/a>. The Umbrella plan would put Aave\u2019s DAO first in absorbing losses, followed by volunteer underwriters, while limiting this initial coverage to those three lending markets.<\/p>\n<p>The proposed underwriting targets are 800 ETH for Core WETH, 400,000 USDC for Core USDC and 400,000 USDT for Core USDT. TokenLogic sized them for six to eight weeks of expected loan growth. They are targets for a proposed configuration, not balances already committed to protecting lenders.<\/p>\n<p>For suppliers, the boundary is the specific reserve, or asset pool, receiving their deposit. Coverage for Core USDC would not extend to USDC supplied to another Hub, even though the token is the same. Capital allocated to one Hub asset cannot clear another reserve\u2019s deficit.<\/p>\n\n<div class=\"cs-article-embed\">\n    <a href=\"https:\/\/cryptoslate.com\/aave-lending-proposal-would-grant-emergency-powers-without-requiring-public-reports-on-their-use\/\" class=\"cs-article-embed__link\">\n        <div class=\"cs-article-embed__body\">\n            <span class=\"cs-article-embed__related-reading\">Related Reading<\/span>\n            <h3 class=\"cs-article-embed__title\">Aave crypto lending proposal would let emergency tools freeze markets &#8211; but not unfreeze them<\/h3>\n        <\/div>\n        <span class=\"cs-article-embed__arrow\" aria-hidden=\"true\">\n            <i class=\"fa-light fa-arrow-up-right\"><\/i>\n        <\/span>\n    <\/a>\n<\/div>\n\n<h2>Who would absorb losses?<\/h2>\n<p>Bad debt arises when liquidation exhausts a borrower\u2019s collateral but leaves debt unpaid. Under the proposed framework, Aave\u2019s DAO would absorb an initial layer through \u201cdeficit offsets\u201d: 33 ETH for Core WETH, 15,000 USDC for Core USDC and 15,000 USDT for Core USDT.<\/p>\n<p>Umbrella underwriters could lose their committed capital to cover deficits beyond that layer. Their funds would keep earning supply yield until used, with coverage implemented by burning supplied Hub shares. Additional rewards compensate participants for accepting that loss risk.<\/p>\n<p><a href=\"https:\/\/cryptoslate.com\/wp-content\/uploads\/2026\/09\/exec-2387b419-ea65-4df3-8d2a-5aee2f9e8bd1.png\" target=\"_blank\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-562210\" src=\"https:\/\/cryptoslate.com\/wp-content\/uploads\/2026\/09\/exec-2387b419-ea65-4df3-8d2a-5aee2f9e8bd1.png\" alt=\"Proposed Aave V4 Core coverage: WETH target 800 ETH with 33 ETH DAO offset; USDC and USDT targets 400,000 each with 15,000 offsets. Targets are not funded balances; underwriters remain at risk during cooldown.\" width=\"720\" height=\"900\" srcset=\"https:\/\/cryptoslate.com\/wp-content\/uploads\/2026\/09\/exec-2387b419-ea65-4df3-8d2a-5aee2f9e8bd1.png 1122w, https:\/\/cryptoslate.com\/wp-content\/uploads\/2026\/09\/exec-2387b419-ea65-4df3-8d2a-5aee2f9e8bd1-240x300.png 240w, https:\/\/cryptoslate.com\/wp-content\/uploads\/2026\/09\/exec-2387b419-ea65-4df3-8d2a-5aee2f9e8bd1-819x1024.png 819w, https:\/\/cryptoslate.com\/wp-content\/uploads\/2026\/09\/exec-2387b419-ea65-4df3-8d2a-5aee2f9e8bd1-768x960.png 768w\" sizes=\"(max-width: 720px) 100vw, 720px\" \/><\/a><\/p>\n<p>Eligibility for that coverage would include all borrowing from each protected reserve. That includes loans originated through Spokes, the components where debt is created, whose collateral sits in other Hubs. Those credit lines still expose the Core reserve supplying the borrowed asset.<\/p>\n\n<div class=\"cs-article-embed\">\n    <a href=\"https:\/\/cryptoslate.com\/half-of-aaves-debt-sits-in-just-9-of-positions-built-around-one-ethereum-correlation-trade\/\" class=\"cs-article-embed__link\">\n        <div class=\"cs-article-embed__body\">\n            <span class=\"cs-article-embed__related-reading\">Related Reading<\/span>\n            <h3 class=\"cs-article-embed__title\">Half of Aave\u2019s debt sits in just 9% of positions built around one Ethereum correlation trade<\/h3>\n        <\/div>\n        <span class=\"cs-article-embed__arrow\" aria-hidden=\"true\">\n            <i class=\"fa-light fa-arrow-up-right\"><\/i>\n        <\/span>\n    <\/a>\n<\/div>\n\n<p>Underwriters would also face a delay when leaving. Each proposed market specifies a 20-day cooldown followed by a two-day withdrawal window. <a href=\"https:\/\/aave.com\/help\/umbrella\/unstake\">Aave\u2019s withdrawal guidance<\/a> says participants who miss the window must activate another cooldown and wait a further 20 days.<\/p>\n<p>Starting that exit process does not remove the risk: <a href=\"https:\/\/aave.com\/help\/umbrella\/umbrella\">Aave\u2019s Umbrella documentation<\/a> says staked assets remain exposed to slashing during cooldown while continuing to earn rewards. The extra yield therefore comes with both potential capital loss and restricted access to funds.<\/p>\n<p>TokenLogic does not recommend initial general-purpose coverage for USDG or frxUSD. It cites uncertainty over incentive-sensitive lending activity and the ability to attract underwriters who transfer risk away from existing suppliers. For frxUSD, it highlights a concentrated, issuer-linked supplier base.<\/p>\n<p>The assessment also leaves other Hubs\u2019 reserves outside the initial plan, for varying reasons including limited incremental protection and narrow supplier bases. These exclusions do not mean the loans lack collateral or that losses are imminent.<\/p>\n\n<div class=\"cs-article-embed\">\n    <a href=\"https:\/\/cryptoslate.com\/rising-aave-borrow-rates-threaten-to-flip-ethenas-usde-yield-loops-into-negative-carry\/\" class=\"cs-article-embed__link\">\n        <div class=\"cs-article-embed__body\">\n            <span class=\"cs-article-embed__related-reading\">Related Reading<\/span>\n            <h3 class=\"cs-article-embed__title\">Aave\u2019s proposed interest rate hike threatens to crush Ethena\u2019s most popular yield loop<\/h3>\n        <\/div>\n        <span class=\"cs-article-embed__arrow\" aria-hidden=\"true\">\n            <i class=\"fa-light fa-arrow-up-right\"><\/i>\n        <\/span>\n    <\/a>\n<\/div>\n\n<p>TokenLogic proposes monitoring conditions after activation and reassessing the framework after three months, with excluded markets reconsidered as lending activity matures and supplier bases diversify.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>TokenLogic proposes Core WETH, USDC and USDT protection, with DAO offsets absorbing first losses before volunteer underwriters.<\/p>\n","protected":false},"author":1264,"featured_media":562465,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[46940,77968,79325,60035,32631],"tags":[81080,72190,76896,76824,72860,77006],"post_folder":[],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v21.9 (Yoast SEO v21.9.1) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Aave V4 safety net proposed for three Core markets<\/title>\n<meta name=\"description\" content=\"Aave V4\u2019s proposed Umbrella plan covers Core WETH, USDC and USDT, with DAO first-loss offsets and underwriters still at risk during cooldown.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, 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